The rollout of the TradeRev mobile wholesaling platform has been a larger undertaking than expected and will eat into the company's bottom line until 2021, executives for KAR Action Services said Wednesday.
In the fourth quarter, KAR Auction Services' net revenue rose 4 percent to $929.0 million. Adjusted earnings rose 6 percent to $206.6 million, while net income for the period dropped 61 percent to $67.3 million, much of it occurring because the company recorded a $69.7 million income tax gain in 2017.
The company said it incurred an operating loss of $15.7 million in the quarter that was attributable to the rollout of TradeRev.
KAR shares slipped on the news, falling 13.2 percent to $46.73 in afternoon trading.
For the full year, KAR's revenue climbed 9 percent to $3.77 billion. Its adjusted earnings improved 7 percent to $893.9 million. TradeRev's rollout resulted in a $53 million operating loss for the year.
KAR CEO Jim Hallett told Automotive News that costs have been driven by investing in hiring and deploying staff needed to bring the technology to dealers, and then showing them how to use it. "The biggest part of it is head count," he said. "It's staffing up."
The company has more than 600 employees at TradeRev and expects to double that over the next few years..
In addition to simply showing dealers how to use TradeRev, KAR could be facing some resistance from those who are not as receptive to new technology. Hallett said it only takes two or three minutes to load a car onto TradeRev, vs. time spent calling wholesalers to list a car that may take days or weeks to go through the wholesaling process.
"Sometimes it's hard to change the habits of the people that are in the trenches every day," he said.
The company also needs TradeRev to reach scale, with more dealers uploading more cars. It needs to achieve this growth while increasing TradeRev's presence from its 128 current markets to 175 markets by the end of the year. As the company reaches this scale, it expects TradeRev's losses to be reduced in 2020, and then to break even in 2021.
In a call with investors and analysts, KAR executives said they believe TradeRev can achieve upward of a 70 percent gross profit profile once it reaches volume. About 117,000 cars sold on platform in 2018, and KAR is estimating it will sell more than 200,000 in 2019.
KAR told Wall Street it expects to post income ranging from $333 million to $355 million in 2019 along with adjusted earnings between $953 million and $988 million.
